Yes, Inequality Is a Problem — When Caused by the Government

When the topic of inequality comes up, some libertarians and conservatives tend to approach the issues as something that doesn't matter at all. "I don't care about inequality," they say. "Inequality occurs naturally, and its just an obsession of leftists...if anything it's a good thing."

Part of this appears to be a natural reaction to the fact that inequality is held up by many interventionists, socialists, and leftists of various types as something that somehow causes poverty — or is at least a grave injustice even when everyone is getting richer to various degrees.

Indeed, the issue of inequality has become so intertwined with poverty, that many perceive an increase in inequality to be more or less the same thing as an increase in poverty.

For example, even when empirical data shows that a country's population is becoming wealthier, we nevertheless are sure to hear about how this is nothing to celebrate because inequality is increasing too. This is a common tactic when discussing the South American nation of Chile. Chile is clearly the most prosperous and stable country in Latin America, and if one is going to be poor in Latin America, it's better to be poor in Chile. But, we are told what really matters is that income inequality in Chile is high.

This, of course, is a terrible way of looking at things. For ordinary people, what really matters is that they are increasingly able to afford and access the basics of life and a decent standard of living: amenities like climate-controlled housing, easy-to-use transportation, food, and clothing. Increases in inequality are not an impediment to this. In fact, we often find that societies with a rapidly rising standard of living overall often have more increasing inequality as well.

Inequality Is Sometimes the Byproduct of Economic Progress

This is because a relatively-free economic system is not a zero-sum game. As Ludwig von Mises pointed out, those who are most skilled at providing affordable goods and services to a large number of people are often those who receive the most rewards economically. It only makes sense that as standards of living increase, those who foster that increase the most might also get richer faster.

In other words, there is no cause and effect relationship between a high or growing inequality, and a low or declining standards of living. In many cases, as in Chile, the opposite is true. Inequality increases as living standards for the poor also increase.

When Government Causes Inequality

But rising inequality isn't necessarily the doing of the marketplace.

In a world of "third-way" regimes, government intervention is a cause of inequality at least as much as is the market. There are a number of ways that governments increase inequality, primarily through government regulations and through monetary policy.

Government regulation as a means of increasing inequality has a long history. Historically, favoring some groups over others via government regulation has been called mercantilism, corporatism, crony capitalism, and other names. Its role in inequality has long been a motivating factor for those who opposed it, such as the American Revolutionaries and other radical laissez-faire liberal groups of the eighteenth and nineteenth centuries. They sought to overturn policies that favored some well-connected government-favored groups at the expense of everyone else. These regulations included government restrictions on trade, government corporations founded to exercise monopolies, private firms receiving subsidies, and government restrictions on private businesses. The effect of all of these policies has always been to increase the wealth and privilege of some groups at the expense of others. In Britain, Richard Cobden's Anti-Corn-Law League was one of the most successful free-trade movements in history. Cobden explicitly pointed out how government policy, through tariffs, drove up food prices in order to benefit wealthy land owners at the expense of workers. Needless to say, this was a cause of income inequality.

These sorts of regulations, of course, persist today. Any law or regulation that limits competition, limits trade, or subsidizes a group or industry naturally increases inequality and benefits some more than others. More often than not, these laws are written and enforced in ways that favor the politically powerful.

In the wake of the 2008 financial crisis, for example, federal banking regulation has likely been responsible for a decline in small community banks while huge banks prosper and consolidate market share.

With monetary policy, the effects often appear in a more subtle fashion. Nevertheless, inflating the money supply favors some groups — usually wealthy ones — over others. This is due to the fact that newly created money — whether created by central banks or private banks — does not enter the economy evenly. As recent empirical evidence has shown, in recent years central-bank policy in the United States has resulted in an economy where the groups that benefit most from ultra-low interest rates and loose monetary policy have tended to be well-capitalized large firms and the financial sector. Meanwhile, small businesses, the non-financial sector, and riskier start-ups have lost out. At the same time, those firms and institutions that receive the money first are able to spend that money before prices adjust to reflect the inflated money supply. Other people and institutions aren't so lucky.

And then there is the role monetary policy plays in the boom-bust cycle, and its resulting unemployment, malinvestment, and dislocations. As the Fed's own research shows, declines in wealth and income growth have been larger for some groups than for others as these policies have been put in place. This is then made worse when the "solutions" for economic busts include bailouts and the "too-big-to-fail" doctrines. The benefits of these, naturally, tend to accrue to the largest, most politically well-connected firms.

Why Inequality Still Matters

Given all of this, it is clearly not the case that inequality is simply a byproduct of beneficial market processes, or that there's no point in taking a closer look at it. The real challenge of studying inequality lies in identifying what is attributable to beneficial market freedom, and what is attributable to government intervention in the marketplace. Market-based inequality tends to occur alongside economic progress for everyone — even if some benefit to a greater degree than others. On the other hand, government-caused inequality occurs as part of a zero-sum game in which wealth is redistributed from some groups to others — whether through inflation, regulation, or privileges handed out to certain favored groups. This is something that ought not be ignored.